Department of Justice
U.S. Attorney’s Office
Northern District of Illinois
FOR IMMEDIATE RELEASE
Thursday, September 29, 2016Chicago Futures Trader Charged with Causing $13 Million in Losses from Fraudulent Trading Scheme
CHICAGO — A federal grand jury in Chicago has indicted a futures trader for allegedly causing $13 million in losses in a fraud scheme that led to the collapse of his trading firm.

THOMAS LINDSTROM used deep out-of-the-money options on ten-year Treasury Note futures to make it fraudulently appear that his trading at Chicago-based Rock Capital Markets LLC was profitable, thereby obtaining greater financial compensation for himself, according to the indictment. His fraud scheme caused a loss of at least $13 million and led to the collapse of Rock Capital, the indictment states. Over a six-month period in 2014 and 2015, Lindstrom obtained compensation of $285,000, the indictment states.

The eight-count indictment was returned yesterday in U.S. District Court in Chicago. It charges Lindstrom, 48, of Winnetka, with four counts of commodities fraud and four counts of wire fraud. U.S. District Judge Harry D. Leinenweber scheduled arraignment for Oct. 4, 2016, at 9:45 a.m.

The indictment was announced by Zachary T. Fardon, United States Attorney for the Northern District of Illinois; and Michael J. Anderson, Special Agent in Charge of the Chicago office of the Federal Bureau of Investigation. The Commodity Futures Trading Commission, which today filed a civil enforcement lawsuit against Lindstrom, assisted in the investigation. The CFTC complaint seeks injunctive and other equitable relief, as well as civil monetary penalties under the Commodity Exchange Act.

A tick is the minimum price increment at which an option on a futures contract could trade. Prior to 2016, the Chicago Board of Trade set the minimum settlement value of all options on futures contracts at one tick, even if the actual value of the option was considerably less. For options on ten-year Treasury Note futures contracts, one tick was approximately $15.63.

According to the charges, Lindstrom acquired hundreds of thousands of deep out-of-the-money options on ten-year Treasury Note futures, and on certain occasions he used spread transactions to pay effectively less than one tick apiece. Lindstrom made the trades knowing that these options would likely expire worthless – resulting in losses – but would temporarily appear to have substantial value in his trading account because the minimum settlement value was one tick, according to the indictment.

Lindstrom concealed the scheme by telling Rock Capital’s owner that the options were profitable, when in reality Lindstrom’s trading was causing substantial losses, the indictment states.

The public is reminded that an indictment is not evidence of guilt. The defendant is presumed innocent and is entitled to a fair trial at which the government has the burden of proving guilt beyond a reasonable doubt. Each count of commodities fraud is punishable by up to 25 years in prison, while the wire fraud counts each carry a maximum sentence of 20 years. If convicted, the Court must impose a reasonable sentence under federal statutes and the advisory U.S. Sentencing Guidelines.

The case is being prosecuted by the Securities and Commodities Fraud Section of the U.S. Attorney’s Office in Chicago. The government is represented by Assistant U.S. Attorney Sunil Harjani and Special Assistant U.S. Attorney Lindsey Evans.

Why wouldn't the firms Risk metrics not flag such positions. If any deep ITM puts or calls were sold, wouldn't the VAR or exposure risks be immediately flagged in the books, let alone their margin cushion be eroded. How could any of these be hidden, especially after the 2009?
I would blame Rock Capital's clearing house and brokerage. Traders are going to misbehave for a given incentive. Its up to the risk department to keep them in check!

Fat-finger mistake. I meant OTM options. ITM wouldn't shock the VAR numbers on the risk metrics. Usually OTM show up as big exposure risk for +/- 30% change in underlying. Did they not model the 10yr bond to be shocked?

Usually OTM show up as big exposure risk for +/- 30% change in underlying. Did they not model the 10yr bond to be shocked?

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Did you read the article? He bought (not sold, he was long these options) effectively worthless options. 30% shock can have a large effect on short OTM options, but will have little effect on long OTM options left bounded at zero mark.

Did you read the article? He bought (not sold, he was long these options) effectively worthless options. 30% shock can have a large effect on short OTM options, but will have little effect on long OTM options left bounded at zero mark.

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Gotcha! I read the "profitable" part as credit spread. This would be interesting to construct and see how the settlement prices moves along.

I see this as an indictment of the CME/CBOT's shitty options on futures settlement and Marked to Market policy as much as malevolent gamesmanship on Lindstrom's part. Surely the CBOE has a better settlement policy for very small increment OTM options ?

My educated guess is that Lindstrom was able to secure the $285K as an unusually healthy draw against the hyper inflated unrealized paper profits. The prop firm never knew that they were "paper" profits because of course they were relying upon the CME Clearing Corporation's daily settlement marks. I am guessing that Lindstrom was only there six months because expiry was achieved on some of these positions and the marks were reconciled ?

I've always been curious about malevolent genius. Could Lindstrom have used that same genius for gamesmanship to legitimately trade under or over-valued interest rate options ? Note: if Lindstrom had just taken the same paltry $4K monthly draw as the other traders then he very likely could have skated on this IMO...... He insisted and cajoled on the ridiculous outsized draw because he knew the glitter was in fact shit.

Yeah, too bad the Risk Manager at Rock Capital couldn't manage to run an elementary options pricing model against the FCM daily statements (which the firm principal directly gets also - those weren't hidden by the trader).

From the CFTC:

"Lindstrom’s Scheme was Uncovered on January 27, 2015

As alleged, even though the options Lindstrom acquired were so far out of the money as to be essentially worthless, they settled each day up until expiration at the minimum tick value of $15.625. The Complaint states that from one contract expiration to the next, as the options expired worthless and his account’s phony profits were wiped out, Lindstrom allegedly acquired more and more out-of-the-money options to cover the realized losses his account had incurred and create more phony profits. By January 27, 2015, when his trading activity was discovered, Lindstrom accumulated a position of more than 950,000 deep out-of-the-money T-Note Options, and held 99.9% or 100% of the open interest in at least ten T-Note option contracts, the Complaint alleges.

According to the Complaint, Lindstrom hid his scheme from and defrauded Rock Capital by sending Rock Capital’s principal screenshots from trading software that Lindstrom doctored to omit his huge position in deep out-of-the-money options. Lindstrom allegedly took draws of $285,000 from Rock Capital based on his phony profits. In doing so, Lindstrom allegedly failed to disclose his huge position in deep out-of-the-money options that was not accurately valued on his trading statements, the risk that the position posed to the firm, and that he had exceeded his $500,000 margin limit by millions of dollars.

When Lindstrom’s scheme was uncovered, his account had a net liquidation value that was inflated by more than $15 million, the Complaint alleges. Lindstrom’s fraud was uncovered just days before he was to receive an additional payment of more than $500,000."

I also noticed that attorneys have kept Rock Capital incorporated because they are suing about a dozen Wall Street banks that took the other side of the trade. Which doesn't make sense to me as in my mind this is a CME/CBOT technical fault but I'm sure that as a Member Firm Rock agreed to hold CME harmless. Whatever.

I know, right ?!?!!. WTF kind of firm Principal or Risk Manager allows that kind of position... And in terms of risk management - a simple free Excel options pricing macro off the internet would have exposed the whole charade.

I see this as an indictment of the CME/CBOT's shitty options on futures settlement and Marked to Market policy as much as malevolent gamesmanship on Lindstrom's part. Surely the CBOE has a better settlement policy for very small increment OTM options ?

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So often, what passes for "management" in finance (of all sorts!) is knee-jerkedness, *preceded* by severe blinders, lorded-over by CYA maneuvers. This includes Chicago, but also (apparently) Rock_Cap. The answer to your, "Surely, the CBOE has...." is a soft-peddled "no."

Nobody wanted the rock the boat, challenge the status quo, bring up ugly numbers, work the late shift, etc etc. I'll bet we've *all* seen it. (But we hold certain institutions to such high station -- "THEY would never act so short-sighted as this...."

I know, right ?!?!!. WTF kind of firm Principal or Risk Manager allows that kind of position... And in terms of risk management - a simple free Excel options pricing macro off the internet would have exposed the whole charade.

I don't think the CFTC has any reason to question someone simply for purchasing OTM options that expire worthless? What's the Futures Act crime there? You have to remember, federal agencies have assigned jurisdictions and jobs. Finding an employee trying to trick his boss into a higher bonus isn't one of them.

- in such a prop situation if the long option position is not closed does the trader gets the bonus/ payment? I mean are these guys not paid only on "actual Realised profits"
also I am assuming that the firm funded him to purchase those 950000 option knowing that worst case scenario is 100% loss
so was the 13 million cost of those bought options? I don't get it

- in such a prop situation if the long option position is not closed does the trader gets the bonus/ payment? I mean are these guys not paid only on "actual Realised profits"
also I am assuming that the firm funded him to purchase those 950000 option knowing that worst case scenario is 100% loss
so was the 13 million cost of those bought options? I don't get it

Having MUCH experience with Chicago and to some extent NYC proprietary futures trading firms, I can say in terms of my own personal observations that I have never seen a trader get paid out anything close to his or her full share on MtoM, but I sure as hell have seen traders get instantly fired and escorted out of a building on MtoM. (I was enlisted by management to sort through and liquidate a few of these burning shit piles on occasion). It's part of the business.

I have seen some traders, myself included, get very healthy draws based upon protracted performance and positive equity. Every firm that I was ever at had pretty tight risk controls and sharp Risk Managers. Most did not like options trading unless there was a large element of market making or delta neutral spread arbitrage involved. Again, my own observations - YMMV.

Having MUCH experience with Chicago and to some extent NYC proprietary futures trading firms, I can say in terms of my own personal observations that I have never seen a trader get paid out anything close to his or her full share on MtoM, but I sure as hell have seen traders get instantly fired and escorted out of a building on MtoM. (I was enlisted by management to sort through and liquidate a few of these burning shit piles on occasion). It's part of the business.

I have seen some traders, myself included, get very healthy draws based upon protracted performance and positive equity. Every firm that I was ever at had pretty tight risk controls and sharp Risk Managers. Most did not like options trading unless there was a large element of market making or delta neutral spread arbitrage involved. Again, my own observations - YMMV.

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How do they account for the fact that you will constantly have realized and unrealized pnl as you are recycle risk? I was always paid on year end pnl regardless of what was realized or unrealized.

You were a lucky man, then. Every firm I was ever with only paid out my FULL SPLIT SHARE on realized (closed) positions.

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I worked for a bank - and there was no real concept of realized pnl. If you were running a vol book, you were always buying and selling options to maintain a certain risk profile. Only when you left the firm would your book pnl be fully realized.

How would a guy in my example get paid when he's constantly moving his risk around?

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Well, a registered CME/ICE prop firm (futures and swaps) is going to give you a legitimate 50% of your net trading profits. My own contract specified $12M daily margin with $2M MaxDD. I had a contract that called for me to be paid a ratio'ed draw on unrealized profits. You need to understand that a firm like DRW or Ronin for example have a different business model than a bank desk. Various times I ran a desk and paid employees and expenses out of my own draw. I could also buy into a greater payout with the option of getting out of prop and into a HF by putting up my own $$.

Well, a registered CME/ICE prop firm (futures and swaps) is going to give you a legitimate 50% of your net trading profits. My own contract specified $12M daily margin with $2M MaxDD. I had a contract that called for me to be paid a ratio'ed draw on unrealized profits. You need to understand that a firm like DRW or Ronin for example have a different business model than a bank desk. Various times I ran a desk and paid employees and expenses out of my own draw. I could also buy into a greater payout with the option of getting out of prop and into a HF by putting up my own $$.